Credit risk refers to the possibility that a borrower may fail to repay a loan or meet contractual obligations. This risk can affect lenders, investors, and financial institutions, leading to potential financial losses. Credit risk is often assessed using credit scores, which evaluate a borrower's creditworthiness based on their financial history. To manage credit risk, lenders may require collateral, charge higher interest rates, or diversify their loan portfolios. Tools like credit derivatives and insurance can also help mitigate potential losses. Understanding credit risk is essential for maintaining financial stability in both personal and business finance.